Kuala Lumpur Composite Index: Bearish Reversal in the making

It has been a slightly bearish week for the Malaysian equity market as investors are worried about whether the current economic improvements are able to be sustained in the long run. The up-trend of most markets has currently come to a halt has investors are concerned that the equity market has gone far ahead of the economic fundamentals. Lack of buying interest pressured to market to fall last week. The KLCI fell 13.03 points or 1.2% lower on-week and 6.11 points lower on-month to close at 1,065.68 points Thursday. The bullish sentiment has started to change its course.

In the International Monetary Fund (IMF) World Economic Outlook Update released Wednesday, it expects global economy in terms of gross domestic product (GDP) to shrink by 1.4% this year against its earlier forecast of 1.3% released in April. As for next year, it lifted its forecast to a growth of 2.5% against an earlier projection for a 1.9% growth. Recent decline in the prices of commodities like crude oil, gold and edible oils expands investors fear of the current economic growth. The leading consumer market in the world, the United States employment rate continues to increase and house prices continue. They are starting to spend less again after some confidence few months ago.

Technical indicators already detected sluggish momentum in the uptrend a few weeks ago. The KLCI is below the short term 30-day moving average again the second time since end June. The short term up trend is being tested again, and this time with a stronger bearish momentum. The longer term 60- and 90-day moving averages are still increasing indicating that the underlying up trend is still intact.

However, the increasing bearish pressure has caused to uptrend momentum to weaken further. The RSI and MACD indicator do not show any signs of improvement in the long term up trend momentum last week. Trading volume shrunk further with a daily average of 825 million shares last week as compared to 1 billion shares in the previous week. The bulls are hesitating now and the bears are slowly marching in.

The Ichimoku Cloud indicator has started to widen a little but remains at the same level and it looks like the KLCI is moving towards to cloud of uncertainty. The thickening cloud in a side way movement indicates that the market is getting more uncertain. However, this indicator also indicates that there should not be any strong reversals in the next one month. The ADX indicator is declining with its PDI and MDI lines crossed each other three times in one month.

Market volatility seems to be calmer now. The Bollinger Bands difference has declined. The KLCI is currently right in the middle of the bands. The uncertain market sentiment as caused the short term volatility to decline. The 3-day Average True Range (ATR) is currently at 8.8 points, slightly lower as compared to the previous weeks ATR of 10 points.

Traders and investors should also be aware of the latest developments in the US. There is a cause of concern now on the Dow Jones Industrial Average chart. A bearish trend reversal chart pattern has developed on the Dow chart. The reversal is technically confirmed once it breaks below the pattern’s neckline at 8,220 points with a target of 7,600 points. The Dow is currently at 8,178.41 points. It is normal for Dow to come back above the neckline but if it fails to stay above it, then we may see the bearish rally.

The KLCI is unable to break above the near resistance level at 1,080 points and it has become an intermediate swing high based on Barros swing calculation. This is the first lower swing high since the bull trend started in March. This, with other technical indicators is suggesting stronger resistance. It will take a very strong fundamental catalyst to boost the market to overcome strong resistance and we do not see any catalyst in the very near future. If the market does break above 1,080 points then short-term traders may have a buy opportunity as the KLCI is expected to rally to the next resistance level at 1,160 points but I doubt if it will go above 1,080 points because of the weak momentum.

Immediate support level remains at 1,030 points and a longer support level is at 1,000 points. The KLCI continues to be uncertain in between the support and resistance levels and is therefore difficult to even trade. I have mentioned last week that traders should stay out of the market and liquidate some of their positions if they have a position as volatility is low. The advice shall be the same this week.


Daily KLCI chart with volume as at 9 July 2009 using NextVIEW Advisor Professional

Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.